Taxes you pay

0:00- [Instructor] In many videos, we have talked about the idea that for the government to do all the things it does, it needs money from some places and it gets that money primarily through taxes. So what we're going to think about in this video is at a very high level, we'll go into more detail in other videos, is what are all of the things that you are going to pay taxes on?

0:21Well, for most folks, especially if you're earning an income, first and foremost, you are going to pay income tax. This is tax on your income, and there's usually multiple layers of income tax. You're definitely going to be looking at federal income tax, I'm assuming a U.S. context here, but depending on the state, there could also be state income tax.

0:45And depending on where you live, that even certain localities and cities have local income tax. Now, for most people, the bulk of it is going to be that federal income tax. And just to give you a sense, and once again we go into a lot more detail on this in other videos, and you don't have to pay attention to all of this.

1:03I know there's a lot of information here, but these are the tax rates as of right now, as best as I could find for, let's just focus on if you are a single filer. And what this shows you is that every incremental amount of money, whether depending on what threshold hits, you pay a higher and higher rate.

1:22So for example, based on this, the first $11,600 that you make, you get taxed at 10%. Then every incremental dollar above that, that's still below 47,150, you're going to get taxed 12% all the way to the highest bracket being 37%. I talk about in other videos, a lot of people think that if you're making over $690,000, that you're going to pay 37% on all of your money.

1:46That's not the case. You're only going to pay 37% on the amount above 609,350. The amount between 243,726 and 609,350, you're going to pay 35%. And all the way down. And states, some states have no income tax, some states have reasonably high income tax where it could be 10%, 11%, 12% of your income, especially if you combine it with local income tax.

2:13Now, what are you paying income tax on? Well, the most obvious one might be your paycheck, but it could also be your contractor, you have a side gig, maybe income that you're getting on investments. This could be dividends, interest, it could be rent if you're renting things out, even unemployment benefits could be subject to income tax.

2:32The things that you are not paying income tax on certain social security benefits, gifts up to a certain amount, there's a certain amount that's exempt, but if it gets into the roughly 10, 11, $12 million range, then you're going to have to start paying the estate tax, but if it's below that, you tend to not pay for a gift inheritance, you don't pay income tax on gifts and inheritance.

2:55Certain insurance proceeds and things like child support tend to be not taxable, but that you should, you should pay close attention to, look it up for your circumstance. Now, another major source of government revenue and another place where you are paying, you are likely paying the government a reasonable amount on an annual basis, is sales tax.

3:14And this is the one that most of us encounter, especially when we are young. You have gone to a store and it says 99 cents, and you go to the cash register and they charge you a dollar eight and you're just like, wait, that's 9 cents more than I thought I was going to pay.

3:27Well, that's because of the sales tax. And generally speaking, you're going to pay sales tax on things like clothes, furniture, digital things like games and music, cars. Sales tax can be pretty significant. Some states you might be spending nine, 10% sales tax.

3:45If you're buying a $30,000 car, that's a lot of money. Services, say repairs for that car, certain groceries, things that are prepared. The things that tend to not be taxable, things like raw foods, prescriptions. And the reason why the government does that, they say like people absolutely need raw food.

4:02They're not, it's not a luxury item. Same thing, they need their medication. Now, if you have investments and those investments are increasing in value, another source of tax are capital gains. So this could be, let's say you bought a building for $100,000 and 10 years later it's worth 200,000.

4:24And only when you sell capital gains only come in when you realize those gains. So if you sell it, that building, you sold it for 100,000 more than you bought it, you're going to pay capital gains on it. It's usually a lower tax rate than the income tax rate, but it could be significant.

4:39Now, capital gains are for stocks. If you hold it for a long period of time, usually over a year, if you had gains on a stock, usually less than a year, short term capital gains, it usually gets taxed as income. But we go into more detail in other, in other videos.

4:53And there are also exemptions on capital gains. Depending on where you live or the context, you could get an exemption for, say the sale of a personal residence up to a limit. Now we have whole videos on each of these, but going into that situation where you have significant property, usually real estate is the biggest asset that folks own, but it could be other thing, it could be vehicles, even things like boats, motorcycles.

5:19But usually when people talk about property tax, the biggest one is usually a home or some type of a real estate. And this is based on the value of those things, and it's usually on an annual basis. And it could be anywhere from less than a percent to a little bit more than a percent.

5:36It even actually goes even higher than that in certain jurisdictions. And you might think a percent isn't that much, but when it's every year on an asset that might be worth 100, 200, 300,000 or even more, might be worth half a million or a million dollars. That becomes a lot of money.